4.2 The macroeconomic model
Models are tools by which we simplify reality. They consist of variables that are related by theory, which means a change in one set of factors leads to a subsequent change in other factors. The first set is sometimes referred to as determinants, and the second set is referred to as outcomes.
4.2.1 Determinants
4.2.1.1 Domestic market forces
Activities
Wikipedia: "Washington Consensus"
- Read this article about the rationale for economic assistance to the developing world. The reading also points out how the rationale obscures the differences between microeconomics and macroeconomics. You should make note of the extent to which the rationale takes into account income distribution and related issues.
4.2.1.2 External shocks
Activities
Wikipedia: "Shock"
- Read this article, which will introduce you to various types of economic shocks, including demand and supply side types.
4.2.1.3 Policy levers
Activities
Wikipedia: "Macroeconomic Policy Instruments"
- Read this article, which covers two basic instruments used to achieve the macroeconomic goals that you need to keep in mind throughout this course. These two instruments are monetary policy and fiscal policy.
4.2.2 Outcomes
4.2.2.1 Output
Activities
Wikipedia: "Output"
- Read this article, which covers several aspects of quantifying national output for a country.
4.2.2.2 Jobs
As a brief refresher, three major macroeconomic goals are price stability, economic growth, and full employment. Some primary and interrelated outcomes from the goal-based macroeconomic model are outputs and jobs. Those two outcomes that represent employment as resources such as labor, land, and capital are employed in producing outputs. In essence, workers produce outputs, their work generates income, and their income is spent on the outputs from the work of others. The association between outputs and incomes, in part, influences both the prices of goods and services and the price level.
4.2.2.3 Prices
4.2.2.4 Growth
Activities
Principles of Macroeconomics: "Chapter 5, Section 1: Growth of Real GDP and Business Cycles"
- Read this section and attempt the "Try It" exercises. This material will provide you with a general understanding of how the present financial crisis can be contextualized by studying macroeconomics, which is the analysis of aggregate values of economic variables. Keep in mind that economic growth is partly a function of the extent to which there are employments of land, labor, and capital. Issues such as worker productivity, technological state, and public policy influence economic growth. Economic growth is evident in the rise in real GDP over time, for example, when the peaks in business cycle become higher and higher and the outward movement of the production possibilities curve. Keep in mind that there are many ways to measure economic growth.
4.2.2.5 International balances
